Mauritius central bank governor Rundheersing Bheenick demanded a revision in the law governing the composition of the Monetary Policy Committee (MPC).
Unlike the situation in most developing economies, the MPC in Mauritius comprises a majority of external members who outnumber bank members, the governor pointed out.
Recently, the MPC voted to hold the key repo rate steady at 4.65%, even as its members were divided, triggering a public rift between the governor and finance minister. It may be noted that the MPC comprises three central bank executives and five members appointed by the finance minister.
“The time is ripe for a review of legislation to give the Bank operational independence in the formulation and implementation of monetary policy,” said Bheenick, in his ‘Letter to the Stakeholders’.
“Through an appropriate level of the Key Repo Rate (KRR) could contribute to a more balanced economy, it should be accompanied by appropriate fiscal policies and supported by bold structural policies to raise productivity across public and private sectors,” he added.
The document of 34 pages, themed “Unlocking our potential in uncertain times”, also calls for a rethinking of the island’s economic strategy in the light of muted growth prospects in advanced economies, combined with a slowdown in growth momentum in emerging economies.
“I strongly believe that a rebalancing of the economy, away from consumption and towards investment and exports, is urgently required if we want to contain rising current account deficits, sustain strong growth, and graduate to high-income economy,” said Bheenick.
Bheenick then addresses another sensitive issue, excess liquidity. According to him, the Bank’s efforts to boost the economy by combating rupee appreciation and absorbing liquidity combines with negligible returns on its reserves to raise serious concerns about the robustness of the Bank’s balance sheet.
Large and growing balances in Special Funds such as the National Resilience Fund, the build Mauritius Fund and the Road Decongestion Program Fund, all financed by Budget measures and transfers, are hindering the bank from achieving its objective of monetary and financial stability.
The Treasury places these funds with commercial banks, further inflating the level of excess liquidity, and handicapping the Bank in the management of liquidity in the banking system.
To add insult to injury, the bank’s actions and authority were further undermined by the treasury, effectively acting as a lender of the first resort via the development of these funds to cash-strapped commercial bank, which would otherwise have taken the normal route of seeking accommodation from the Bank and enabled the repo rate corridor to gain traction.
“I have complained against both of these practices as I believe that a Single treasury Account placed at the central bank, does represent best practice and that it is unhealthy for the single largest player on the financial market to frustrate the Bank by its actions. We are now exploring the possibility of requiring a higher Cash Reserve ratio from Special Fund deposits in excess of transaction balances” said Bheenick
Bheenick also championed an “adult approach to understanding monetary and fiscal policy”, blaming the press and other economic commentators for blowing some issues out of proportion, besides asking misguided questions about the independence of the Central bank and the effrontery of an “unelected” Governor not heeding the wishes of elected officials.
However, the governor ended on a positive note, observing that the economy maintained its positive growth momentum despite soft economic conditions in the main trading-partner countries.
This has enabled Mauritius to maintain its unblemished record of positive GDP growth throughout the global financial crisis, he concluded.
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